Refinance risk: Australia's green power profits may be under threat

By James Thornhill

February 28, 2019 — 3.55pm

The profitability of Australia's first wave of renewable power projects may be threatened as lenders will likely push for some debt reductions when the projects come up for refinancing, according to the former chief risk assessor at the nation's green bank.

During Australia's clean energy investment boom in recent years, the local banks were generally unwilling to lend beyond five years.

The amount of renewable projects coming up for refinancing over the next three to four years could run to several billion dollars.Credit:RCR

That means projects will face refinancing just when they've barely started to earn returns, Stephen Panizza, the former chief investment risk officer for the Clean Energy Finance Corp. said in an interview. That may force developers to use up cash paying down more of the loan principal or take on higher interest rates.

"I don't think people have taken into account that refinancing risk," Mr Panizza said. "Banks will want to see some deleveraging, so I don't think the returns on equity are going to be as great as everybody expected."

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Mr Panizza said the amount of renewables coming up for refinancing over the next three to four years was likely to run to several billion dollars.

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According to MUFG Bank, one of Australia's biggest renewables lenders, refinancing risks vary widely across the market, but shouldn't be a problem for well-structured projects with long-term, investment-grade off-take contracts. The bank is a unit of Japan's Mitsubishi UFJ Financial Group.

"There are certainly a number of projects that we did not participate in, and if they have been financed on the terms they were originally presented to us, may be more stressed when it comes to refinancing," said Geoff Daley, head of MUFG's Australian structured finance office.

The bank has an Australian renewables loan book in excess of $1 billion spread over about 25 wind and solar projects.

Mr Panizza is now head of renewables at Federation Asset Management, and plans to target mainly wind and solar projects in the $20 million to $50 million bracket.

He also sees opportunities in waste-to-energy and landfill gas.

Clean energy investments have skyrocketed in recent years, but how will projects go with refinancing?Credit:Bloomberg

Competition from a deluge of new projects seeking access to the grid, coupled with the nation's strong uptake of rooftop solar, is making it increasingly difficult for big solar projects to stack up economically, according to Mr Panizza.

"We want to stay away from the really big-scale stuff," he said. "The risk profile, particularly in solar, of the large-scale stuff is too high."

Gridlock

For Australia's renewables industry to thrive, it's vital to develop a framework for corporate power purchase agreements to reduce the dominance of the three so-called gentailers - retailers which also own the majority of the country's generation assets --AGL Energy, Origin Energy, and EnergyAustralia.

Mr Panizza said some regulatory reform may be needed to facilitate direct purchase agreements between corporates and green power producers, and sees encouraging signs as more companies seek to meet tougher environmental, social and governance criteria.

Australia also needs to upgrade its electricity transmission network to smooth the transition to renewable power. Mr Panizza says there's a rash of projects trying to jump onto a grid, which wasn't set up to accommodate the surge in clean power.

The government's backing of a second interconnector between Tasmania, where generation is dominated by hydropower, and Victoria is a positive step, he said. That could ultimately render Victoria's coal-fired power stations obsolete.

But Mr Panizza acknowledges the difficulty in backing transmission investment.

"The cost of improving transmission needs to be borne by consumers," he said. "

Which is problematic because high energy prices are sensitive politically."